Bonds fall after RBI deputy governor warns banks of high interest rate risk

Bond yields spiked on Tuesday morning after a deputy governor of the Reserve Bank of India (RBI) said public sector lenders face risks of high interest rate from their large bond holdings.

The statement was seen by traders as hawkish and as a message asking them to bring down their bond holdings.

"The size of the banking sector's balance-sheet exposure to G-Secs, and hence its interest rate risk, is high in an absolute sense, and is relatively elevated, when measured in proportion to total assets, for public sector banks relative to private banks," Deputy Governor Viral Acharya said late on Monday.

"The high interest rate exposure of banks from their G-Sec portfolios is attributable to not only the size of their holdings, but also to the increasing maturity of primary issuance," he added.

By 0440 GMT, the benchmark 10-year bond yield was at 7.54 percent, up 10 basis points on the day. It touched a high of 7.56 percent earlier in the session.